Textron Q3 2021 Earnings Call Transcript

Participants

Corporate Executives

• Eric Salander, Vice President of Investor Relations & Treasurer
• Scott Donnelly, Chairman, President & Chief Executive Officer
• Frank Connor, Executive Vice President & Chief Financial Officer

Analysts

• Sheila Kahyaoglu, Jefferies Financial Group Inc.
• David Strauss, Barclays PLC
• Robert Stallard, Vertical Research
• Ronald Epstein, Bank of America Co.
• George Shapiro, Shapiro Research
• Noah Poponak, The Goldman Sachs Group, Inc.
• Unidentified Participant
• Cai von Rumohr, Cowen Inc
• Peter Arment, Robert W. Baird
• Pete Skibitski, Alembic Global Advisors
• Kristine Liwag, Morgan Stanley

Presentation

[Operator]

And ladies and gentlemen, thank you for standing by. Welcome to the Textron Third Quarter 2021 Earnings Conference Call. At t this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Eric Salander, Vice President of Investor Relations. Please go ahead.

[Eric Salander, Vice President of Investor Relations & Treasurer at Textron]

Thanks, Brad. And good morning, everyone. Before we begin, I'd like to mention we will be discussing future estimates and expectations during our call today. These forward-looking statements are subject to various risk factors, which are detailed in our SEC filings, and also in today's press release. On the call today, we have Scott Donnelly, Textron's Chairman and CEO; and Frank Connor, our Chief Financial Officer. Our earnings call presentation can be found in the Investor Relations section of our website.

Revenues in the quarter were $3 billion, up from $2.7 billion in last year's third quarter. During this year's third quarter, we reported income from continuing operations of $0.82 per share. Adjusted income from continuing operations, a non-GAAP measure, was $0.85 per share for the third quarter of 2021 compared to $0.53 per share in the third quarter of 2020. Segment profit in the quarter was $279 million, up $90 million from the third quarter of 2020. Manufacturing cash flow before pension contributions totaled $271 million in the quarter and $851 million year-to-date.

With that, I'll turn the call over to Scott.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Thanks, Eric. And good morning, everyone. We continue to execute well across the company in the quarter. At Aviation, we continue to see a solid recovery in the general aviation market with strong commercial demand, increased deliveries in Citation jets and commercial turboprop's and higher aftermarket volume. We delivered 49 jets, up from 25 last year and 35 commercial turboprop's, up from 21 in last year's third quarter. Order activity in the quarter remained very strong, resulting in backlog growth of $721 million bringing us to $3.5 billion at the quarter end.

Also in the third quarter, the Beechcraft King Air 360 and 260 achieved EASA certification and began to deliver customers throughout the region. Continuing with our product strategy of upgrading existing models at NBAA, we recently announced the Citation M2 Gen 2 and the XLS Gen 2 product upgrades. Also on the new product front, Cessna [Phonetic] Sky Courier is continuing to progress through certification with over 1,600 hours of flight test activity and the Beechcraft Denali successfully completed its initial ground engine runs powered by GE's new Catalyst engine. At Bell revenues were down 3% in the quarter, largely on lower military revenues. On the commercial side of Bell, we delivered 33 helicopters, down 41 in last year's third quarter.

Moving to Future Vertical Lift. In September, Bell submitted its proposal for the FARA program, a down selected award is expected in the second quarter of 2022. On FARA, Bell is about 60% of the way through its build of the 360 Invictus Prototype and remains on schedule. Also in the quarter, Bell inducted the first U.S. Air Force CV-22 for its Nacelle Improvement modifications.

Moving to Systems. We saw another strong quarter of execution with operating margins at 15.1%, up 190 basis points from last year's third quarter. ATAC continued to expand its fleet of certified F1 aircraft with two additional aircraft entering service in the quarter bringing the total fleet to 19 aircraft at the end of the quarter. The fleet continues to support higher customer demand for adversary air services, driving higher revenues in the quarter. At Air Systems, the team booked $25 million in new orders in the quarter, including both fee-for-service activities, as well as new hardware.

Moving to Industrial, overall revenues were lower in the quarter as we continue to experience manufacturing disruptions related to supply chain challenges. In Kautex, we again saw order disruptions related to the global auto OEM supply chain shortages, which have directly impacted production scheduling and resulting in intermittent line shutdowns of manufacturing efficiencies. At Specialized Vehicles, we saw continued strong demand in our end markets with higher pricing, which offset production disruptions from part shortages.

To wrap up, Textron delivered a solid quarter with increased aviation backlog, improved manufacturing margins and continued strong cash generation, while working to minimize the impact of supply chain disruptions.

With that, I'll turn the call over to Frank.

[Frank Connor, Executive Vice President & Chief Financial Officer at Textron]

Thanks, Scott. And good morning, everyone. Let's review how each of the segments contributed, starting with Textron Aviation. Revenues at Textron Aviation of $1.2 billion were up $386 million from a year ago, largely due to higher Citation jet volume of $290 million, aftermarket volume of $62 million and commercial turboprop volume of $48 million. Segment profit was $98 million [Phonetic] in the third quarter, up $127 million from a year ago, largely due to the higher volume and mix of $96 million and favorable pricing net of inflation of $22 million. Backlog in the segment ended the quarter at $3.5 billion.

Moving to Bell. Revenues were $769 million, down $24 million from last year, largely reflecting lower military revenues. Segment profit of $105 million was down $14 million, primarily due to lower military revenues. Backlog in the segment ended the quarter at $4.1 billion.

At Textron Systems, revenues were $299 million, down $3 million from last year's third quarter due to lower volume of $39 million at Air Systems, which primarily reflected the impact from the U.S. Army's withdrawal from Afghanistan on its fee-for-service contracts, partially offset by higher volume, primarily at ATAC and Electronic Systems. Segment profit of $45 million was up $5 million to a favorable impact from performance and other. Backlog in the segment ended the quarter at $2.2 billion.

Industrial revenues were $730 million, down $102 million from last year, reflecting lower volume and mix of $156 million, primarily at Fuel Systems and Functional Components, reflecting order disruptions related to the global auto OEM supply shortages, partially offset by favorable impact of $44 million from pricing, largely at Specialized Vehicles.

Segment profit of $23 million was down $35 million from the third quarter of 2020, primarily due to the lower volume and mix described above, partially offset by higher pricing net of inflation at Specialized Vehicles. Finance segment revenues of $11 million - were $11 million and profit was $8 million.

Moving below segment profit. Corporate expenses were $23 million and interest expense was $28 million. With respect to our 2020 restructuring plan, we recorded pretax charges of $10 million on the special charges line. Our manufacturing cash flow before pension contributions was $271 million in the quarter and $851 million year-to-date as compared to $129 million for the corresponding 9 month period in 2020. Year-to-date, our cash generation reflects improved working capital management, which includes more linearity in quarterly aircraft deliveries and higher customer deposits at aviation from an increased backlog.

In the quarter we repurchased approximately 4.2 million shares, returning $299 million in cash to shareholders. We're raising our expected full year guidance for adjusted EPS to a range of $3.20 to $3.30 per share. This includes revised tax guidance at effective rate of 15.5% for the full year. We're also raising our outlook for manufacturing cash flow before pension contributions to a range of $1 billion to $1.1 billion, up $200 million from our prior outlook, with planned pension contributions of $50 million.

That concludes our prepared remarks, so we can open the line for questions.

Questions and Answers

[Operator]

And our first question goes to the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

[Sheila Kahyaoglu, Analyst at Jefferies Financial Group]

Hi, thank you. Good morning, Scott, Frank, Eric. Backlog at Aviation was at 3.5, I think, an all-time high since 2010. So maybe can you guys talk about who these customers are? Are they new, what's their rationale for buying a new jet? I'm sure $20 million jet buyers disclose all this info. So if you could share that with us a little bit.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Sure. I think the backlog is fairly broad in terms of the makeup of those customers. It still remains you know, more US-centric. I think when we look at order activity in the quarter on the jet side, it's probably you know, roughly 70% were so domestic versus 30% in international. So I think we'll continue to see the shift. It's a little bit more international, as Europe is starting to pick up and South America is starting to pick up. But it is still more North America-centric. It's probably closer to 50-50 on the turboprops, that's usually been a market where it's - the [indecipherable] and such Caravans usually end up being more international. I think it will continue to shift that way. But right now, it's closer to 50-50. But obviously, there's a mix of the next year or so deliveries of what we have coming up with NetJets, but we have very strong retail individual customers in there. It's - if I looked at the number of new customers, folks that are coming in buying a jet who have not owned a jet before, that number probably is somewhere around the 20% or so you know, kind of a range, so you know, which is encouraging.

We do see a lot of people. As you know, buying a jet when you've not had an aircraft before is a little bit of a daunting task. One of the things we do in our business is we have a whole dedicated team that helps someone who's not owned an aircraft like that before, but wants to do that, we help them with the complex issues of pilots and hangers and insurance and all the things that you have to look at to do that to successfully place that aircraft with a brand new customer. But for sure, we're seeing a lot more interest in demand from those first time buyers than we would historically see.

[Operator]

And we do have a question from the line of David Strauss with Barclays. Please go ahead.

[David Strauss, Analyst at Barclays]

Thanks. Good morning.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Sure.

[David Strauss, Analyst at Barclays]

Scott, with the backlog at aviation now and your deliveries year-to-date, I want to see if you could offer an update on how you're thinking about the production plan. I think you had said recovering half of the 2020 drop. It looks like you're tracking well ahead of that. And then your thoughts about going above 2019 levels, just given how extended your backlog is becoming? Thanks.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Sure. Well, David, I mean, I think as we've given color all year long, our expectation was that we would you know, get kind of halfway there this year and get back to the '19 levels in 2022. I think that's still good color to have on it. Obviously, we won't guide until we get into the January time frame. But for sure, the order activity which has been getting stronger as we've worked our way through the year and remained strong, supports that number, and we'll be looking hard at that backlog and that order rate as we finalize our production ramps at aviation. I mean, clearly, right now, we are in the process of ramping up production with the goal, as we stated, to get up to that 2019 level and there's probably room for a little bit beyond that, but we'll give you the final guys when we get into January.

[Operator]

And we do have a question from the line of Robert Stallard with Vertical Research. Please go ahead.

[Robert Stallard, Analyst at Vertical Research]

Thanks, so much. Good morning.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Thanks.

[Robert Stallard, Analyst at Vertical Research]

Scott, on the aviation side, maybe following up from Sheila's question, have you seen any differences in the order intake between the various aircraft models you have? And also on the aircraft, what's the sort of lead time looking at? Are you getting to the point where some of these planes you know, you have to wait more than 12 months to get them?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

So the strength is really across the whole segment, Robert. I mean every model is, I would say, doing very well right now. Order activity and interest in all of them is quite strong. And part of that is you know, we've been putting updates and upgrades. I mean as I said at NBAA, we put the M2, you know, Gen 2 version of that, the Gen2 version of XLS, has been a fabulous aircraft for us for a long time, and it's a really nice update that I think is sparking even greater new interest in that aircraft as well. So it's really across the board. And look, we're not going to get into details on the model by model on the backlog. But as we've said before, I think this business, this industry, frankly, operates better if it's sort of looking at a 9 to 12 month sort of backlog, and that it gives a customer who has an aircraft time to sell the aircraft. It gives them time to specify the interiors and colors and paints.

Obviously, it makes it much easier for us in terms of our production forecasting and then smoother production line flow. And as you know, that - historically, that's how that - this industry works. This last decade has been unusual where you're actually having to try to build to forecast instead. So, I do think one of the things that we certainly keep in mind as we look at production rates is that we want this business to be out there as sort of a 9 to 12 month kind of a backlog business. So it's a much healthier way to run the business. I think it's better for the customers, again, for their planning perspective and marketing of used aircraft if they already have an aircraft, which is the majority of our customers. So I think that that's a healthy place for the business to be, and that's kind of where I feel like we are right now.

[Operator]

And we do have a question from the line of Ronald Epstein with Bank of America. Please go ahead.

[Ronald Epstein, Analyst at Bank of America]

Yes, good morning. Good morning, guys.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Good morning.

[Frank Connor, Executive Vice President & Chief Financial Officer at Textron]

Good morning.

[Ronald Epstein, Analyst at Bank of America]

So Scott, what are you seeing on the pricing front, meaning, I mean, there's demand, right, that's clear. But are your competitors behaving themselves. I mean, how is the broader pricing environment right now?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Look, it's always a competitive market, Ron. But for sure, I think we're seeing a positive pricing environment, as you would expect, right? You have very strong demand. All of the dynamics that we look at in terms of the macro level of the market, are extremely favorable, right? You've got used aircraft available for sale at record low numbers, particularly if you look at something that's sort of less than a 10 year-old aircraft. As you know, that was an issue in this business for a long time, and that's down to kind of below 1% of the fleet, and we're seeing the used aircraft valuations going up, right? So the dynamic overall in pricing is much better than it's been for a very long time. Flight activity is obviously very strong. So we just - we see the demand from everything from charter to memberships to fractionals to the whole aircraft. So I think you have a very, very strong demand environment, you would expect to see better pricing in the environment.

[Operator]

And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.

[George Shapiro, Analyst at Shapiro Research]

Good morning. Scott, on that, you mentioned you had a $22 million benefit in the quarter from pricing. The incremental margin was 33%, which is very high number. Do you expect that kind of trend to continue?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Well, look, there, I think we're going to continue to see good pricing in the industry based on all the dynamics that I just talked about, incremental leverage on volume in this business has typically been sort of in that 25% kind of range. So I think that's a reasonable expectation.

[Operator]

And we do have a question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Hi. Good morning, everybody.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Good morning.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Scott, I guess, what is - in aviation, what is the absolute dollar backlog level or backlog to production ratio that you feel you want to maintain sustainably in the business? Where do you want to keep that?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Well, no, as I said, I think that the place we'd like to see this is kind of out in that 9 to 12 months. I think if you get beyond 12 - you have too much beyond 12 months. I mean customers are interested in new aircraft, right? I mean, so I think there's a limit to how far out someone is willing to say, okay, I'm going to wait for a year. It's probably on that shorter side on maybe a smaller aircraft, where there's not as much customization. It's a little quick return. But I think on a larger aircraft, you see it move out on that in more of that 12 months or so. So there's not an absolute dollar number we look at, but we do look at demand model by model. And where we think that backlog that cycle time is reasonable in terms of where - how it fits with our production planning, how it fits with our customer's expectations. And as I said, I think that's it ideally somewhere in that 9 to 12 months, again, some variability on the models, largely a smaller aircraft, probably being on the shorter side of that and things like longitude being in that more than 12 months or so kind of time line.

[Operator]

And we do have a question from the line of Seth Seifman with JPMorgan. Please go ahead.

[Unidentified Participant, at Textron]

Hey, good morning. It's Tyler on for Seth.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Morning.

[Frank Connor, Executive Vice President & Chief Financial Officer at Textron]

Morning.

[Unidentified Participant, at Textron]

Just on FARA, can you just provide an update just maybe where things stand today, what Textron is doing in the meantime and when we could expect a decision?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Sure. So the FARA program, the proposal went in back at the beginning of September, which was consistent with the army schedule, what their you know, announces that they expect to have an announcement decision and contract with that by the second quarter of next year. So by the end of next year, just kind of our expectations. Remember that the FARA program I feel is a little unique in that we've obviously put an enormous amount of work into getting the proposals submitted. But in parallel with that, we still under are under contract on an OTA. So we are continuing the design development activity towards PDR and that, of course, that work is going on in parallel with the army doing their proposal valuation. So the team obviously kind of worked out on the proposal, and now they're all back hard at work - you know, working towards that next milestone for the program, which will then dovetail into hopefully a program record.

[Operator]

And we do have a question from the line of Cai von Rumohr with Cowen. Please go ahead.

[Cai von Rumohr, Analyst at Cowen]

Yes. Thanks so much. So Scott, obviously, demand is strong in aviation. What are you seeing in terms of commodity price hikes and supplier disruptions that might limit your ability to kind of boost production next year?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Well, we're not - I mean, look, there's always a pop-up problem even in the best of times, right, with managing a supply chain. I would say we're not seeing big issues right now in our - in the supply chain associated with the A&D businesses. My view is, you know, most of these suppliers also do defense work, much like our company. And so most of them didn't go through an entirely hard shutdown, as you saw a lot of the commercial world doing. Also, as you know, a lot of these suppliers also have a lot of business that goes into the commercial aviation space with the Airbuses and the Boeings of the world and those guys are not back anywhere near the demand that they used to have. So there's capacity available in these supply chains. So as we work our way through this thing, most of our critical suppliers in the A&D space are able to meet our demand. I'm not suggesting there's never an issue or a problem, but those things pop up here and there. It's also a longer cycle supply chain. So if you do have a problem or a challenge, you've got more time to work on it and go manage it and look for alternatives and work with the supplier around that. Whereas in the industrial and commercial world, you tend to find out a vital problem it's going to hurt you on Tuesday, the previous Friday. So we don't see as much of that in the A&D side. So, I don't think when we look at this, we feel like we're going to be supplier constrained at this stage of the game. It's more around managing and making sure that we're doing the right thing here in terms of production rates versus long-term demand and again, managing to a backlog that works for us and works for our customers.

[Operator]

And we do have a question from the line of Peter Arment with Baird. Please go ahead.

[Peter Arment, Analyst at Robert W. Baird]

Thanks. Good morning, Scott, and Frank. Hey, Scott, just a quick one on, I guess, aviation. Just you've always kind of talked about this business eventually getting back to crossing over on the double-digit margin front. It seems like you've got everything in place in terms of the overall demand and potentially higher production. What's key for us to see margins kind of cross over that 10% level? Is it just volume or is there other things you need to see? Thanks.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Well, most obviously, volume is a huge contributor to that. We've talked about that for a very long time. And I think we'll see - as you remember, we were getting close to that level pre-pandemic, and I think as our volumes are recovering back on track to where we were in '19 and move beyond that. We clearly have been working to drive to get double-digit margins, and I think we're on track to be doing that. We'll obviously give you more specifics in January, but I feel pretty good about our path to get there.

[Operator]

And we do have a question from the line of Pete Skibitski with Alembic Global. Please go ahead.

[Pete Skibitski, Analyst at Alembic Global Advisors]

Yes. Good morning, guys. Nice quarter. Maybe to piggyback off Cai's question a little bit. Scott, can you talk about kind of how you manage kind of the two businesses at industrial in this environment? Do you have much visibility at Kautex? Would you guide us in any way Kautex over the next couple of quarters? And then, is it kind of -- it seems like the market is very strong in specialized vehicles, but there's, as you mentioned, some supply chain issues there as well. So just wondering if you could give us more color on how to think about that segment over the next couple of quarters.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Sure. Look, obviously, Peter a bit different, right. In the case of Kautex, where we're a Tier 1 guy, we're sort of following the OEM path, right? So we don't independently set that. It's -- one of the challenges, frankly, this year is there's been a lot of disruption that the OEMs have felt and changing model types and volumes through the course of the year as a result of other supply chain issues. Fortunately, the Kautex guys have done a nice job in not being the problem, right? I mean we've been able to fulfill whatever demand is placed on us, and certainly, we don't want to be the reason they can't run a line. So I think our guys have done a really nice job of that. But we look really at the IHS data, Pete, in terms of how it - how we forecast. I mean we obviously have to go down model by model. But I think when you listen to what the OEMs are saying, they're starting to indicate that a lot of their other issues in their supply chain, which semiconductor is the one that's obviously talked about the most, that's going to start to abate.

I think if you look at IHS data right now, they're talking about probably a 10%, 11% increase in global auto volumes as we go from '21 to '22. So that's how we think about our business, right? We look at that IHS data. We don't really have an independent view, I suppose, of what's going on in that market. In the case of our vehicle business, we're the OEM, we're the end market guy. So we are a lot closer and having to make that call. And as you indicated, the good news is demand is very strong. I mean everything we can build is going out in the channel and selling inventory levels are at, frankly, on healthy low levels. We're working hard with our suppliers to get parts in and everything we can build, we get out there and tends to be selling through strongly. So, I think our guys in the vehicle business, frankly, but we would love to have seen revenue growth in the quarter from year-over-year. We couldn't get that just because we can't get the parts to do it, but I think the team has managed price inflation disruption and all that sort of stuff, so that at least we've been able to hold on to the margin rates where we were. And obviously, as we can get the supply chain flowing better and get the revenue top line growing, we think the margins will improve with it. But our dynamics in that business in terms of pricing and the performance of the business was able to at least at a margin level, overcome a lot of the interruptions and inefficiencies that we've seen in the factory. So, I think the business is being well run. It just needs to be able to start to generate more top line, and that's a supply issue, and the demand is quite strong. We've got great products out there. And as a result, we're getting good pricing for them. But we would love to get higher revenues, and I think we will. We just got to work through the supply margins.

[Operator]

And we do have a question from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

[Kristine Liwag, Analyst at Morgan Stanley]

Hey. Good morning, guys.

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Morning.

[Kristine Liwag, Analyst at Morgan Stanley]

Scott, you mentioned how longer lead time nature in aviation provides more visibility for the supply chain and right that makes sense in a normal environment. The vaccine executive order effective December 8 is a little different than what we've seen before. How are you anticipating this executive order to affect labor, your supply chain and ability to raise production in aviation? And what mitigating actions can you take?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

Well, look, it's a good question. And all of our business as well as, obviously, all of our key suppliers are - tend to have that defense component and therefore are subject to the mandate. It's - frankly, it's a curveball we wish we didn't have, but we're managing our way through it. I think we and all of our peers and suppliers are all sort of in the same - in the same place here, it's created a lot of noise. It's not been terribly well received by a pretty sizable portion of our employees, but people are working their way through it. It's the nature of -- I think people have accepted it's a fact of what they've got to go do. And in the end, there's no question that we're going to lose some employees because of this. But we're trying to ramp up our hiring and expectations of that. And look, we'll manage our way through it. It's not the first challenge we've ever seen, so.

[Operator]

And we do have a question from the line of David Strauss with Barclays. Please go ahead.

[David Strauss, Analyst at Barclays]

Great. Thanks for taking the follow up. I guess Frank, question for you. On working capital, it looks like you're assuming for the full year, a couple of hundred million dollar benefit from working capital, I assume that's mainly predominantly aviation advances? How should we think about working capital as we move into next year? That's my first question. And then, any initial thoughts on pension income for next year as compared to I think you're doing like $30 million or so in pension income this year? Thanks.

[Frank Connor, Executive Vice President & Chief Financial Officer at Textron]

Yes. So on the - look, on the working capital front, I think, as we said, we've had a strong year from an inventory management standpoint and the aviation business being far more linear, obviously, is a really good thing there. So we've had kind of better seasonality of cash flow and good customer deposits. The cash flow for the fourth quarter, implying the guide continues to be in the area of 1:1 or a little over 1 of kind of net - relative to net income. So we saw a lot of benefit this year, kind of that we'll continue, I think, to see very strong working capital management next year. I'm not ready to guide on it. A lot of it will depend on order activity. I think that on the inventory side and the linearity of the business, we'll continue to see strong performance. It will depend on kind of customer deposit activity to some degree to how that ultimately works out. Look, on the pension side, we're not ready to kind of lay out numbers there. We've had a good year so far on return on assets. Interest rates are up a little bit. So as you sit here today, I don't think that we would expect to be - we would expect pensions to continue to be a benefit as we go into '22, but we're not ready to quantify things.

[Operator]

We do have a question from the line of Robert Stallard with Vertical Research. Please go ahead.

[Robert Stallard, Analyst at Vertical Research]

Yes, thanks. Just a follow-up from me. I was wondering if there's any changes on the divisional guidance for 2021 with one quarter to go?

[Scott Donnelly, Chairman, President & Chief Executive Officer at Textron]

I don't think, Robert, we're doing a formal update to the guide at the segment level. But clearly, Aviation and Bell are strong performers. And I think you'll see that versus the original guide. Obviously, Industrial with - particularly with the auto OEMs volume down and challenges in supply chain, that will be the sort of bit of a mix shift, I suppose, between what we originally guided and where we'll end the year.

[Operator]

And our last question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead.

[Noah Poponak, Analyst at The Goldman Sachs Group]

Frank, do you expect to be able to grow free cash flow from the manufacturing group next year versus the good performance this year? And then if you could just maybe touch on the systems margin since that seems to have just kind of stepped up to a new level with all the programmatic and mix changes you've had there? I mean, is that just now a sustainably high 14%, low 15% business? Thank you.

[Frank Connor, Executive Vice President & Chief Financial Officer at Textron]

Yes. Look, we're not going to guide '22, as I said, I believe we'll continue to see solid and strong working capital management next year. We had a lot of benefit this year of particularly at Aviation, again, of getting the business kind of running the way Scott described, which is kind of with some visibility on delivery and order activity and run it far more linear. So I would expect that to continue, as I said, into '22. But I'm not going to start kind of guiding cash flow and profitability here for '22. I'm sorry, I know what the second piece of that was a systems margin. Look, on systems, we've talked about this, kind of systems has had a very strong year. Defense business is generally kind of consistent with how we've talked about Bell or kind of 10% to 12%. We have made some investments in systems where we're seeing solid return on those investments. They're a number of businesses there where we have invested in assets to drive higher margins like the ATACH business, so we expect to see good execution on a go-forward basis out of the systems business. But kind of these levels of performance this year are kind of strong relative to the general mix of those businesses. So we expect solid execution on a go-forward basis, but we've had a very good year this year.

[Operator]

And with that, ladies and gentlemen, today's conference will be available for replay after 10 A.M. Eastern to January 29, 2022. You may access the AT&T replay system at any time by dialing 1866-207-1041 and entering the access code 6190396. International participants may dial 402-970-0847. And those numbers again are 1866-207-1041 and 402-970-0847 and again, entering the access code 6190396. That does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.